Not Scaling

One of the things I've always known about myself when it comes to my position as a founder is that the second I have to sit down and fill out an expense report for the HR department, I'll know it's time to go.

The "Why Entrepreneurs Don't Scale" articled really hit home in this regard. I agree with everything that the author included as reasons that founders have a hard time adjusting to a company, with the exception of one omission: that it's perfectly alright if a founder doesn't make the transition. Becoming a multi-decade CEO isn't the only definition of success for an entrepreneur.

I also don't think it has anything to do with personality or innate habits--when it comes down to it, the skill sets for a CEO of a startup vs. a CEO for an established company are very different. For a startup, the skills are more similar to a Project or Program Manager, and the elements mentioned in the article serve them well. A CEO of a big company is entirely different, and in other circumstances it would take many years for a Project or Program Manager to be promoted to CEO. Founders of companies are expected to make that transition in a much shorter time, so it's really no surprise that they don't make the transition that often.

And anyway, who wants to be in charge of things like setting company policies for expense reimbursement? It's much more fun to build things from nothing and be creative :)

Entrepreneur vs. Executive

As indicated in this week’s readings, “the habits and skills that make entrepreneurs successful can undermine their ability to lead larger organizations” (Hamm 2002). According to the readings, these habits include:

• Loyalty to Comrades
• Task Orientation
• Single-Mindedness
• Working in Isolation

Given that I see some of these traits within myself, I appreciated the author’s use of case studies to indicate situations wherein these characteristics attributed to the downfall of companies and situations wherein the rejection of said traits led to a company’s success.

Intrigued by the topic of how I can perform well as both an entrepreneur and an executive, I decided to conduct some research on the subject. My findings include the following:

• Article about how to transition from an Entrepreneur to an Executive on your resume: http://www.jobdig.com/articles/1354/How_to_Make_the_Leap_from_Entrepreneur_to_Executive_on_Your_Resume.html
• Article outlining the differences between and Entrepreneur and a CEO and how to wear both hats: http://www.business-strategy-innovation.com/2009/11/ceo-entrepreneur-or-both.html
• Article on the dilemma of being a founding CEO: http://hbswk.hbs.edu/item/4948.html

Does anyone know of any additional websites or books that can be of use? I am interested in learning of additional resources that can make the process of transitioning from an entrepreneur to an executive successful. Please share if you know of any.

Sources

Hamm, John. "Why Entrepreneurs Don't Scale." Harvard Business Review, 2002: 2-7.

Why Entrepreneurs don't scale

As discussed in the article inventors usually find it difficult to switch to executive mode, as a result of their inabilities to adapt to new challenges and changes. However this is not a something fixed as many executives can learn to scale if they are willing to let go of their old ways and adapt to these new challenges.

John Hamm has identified four tendencies can lead to success or failure for the executives.

1. Loyalty to comrades: While allegiance is great to your colleagues, sometimes executives get carried away that they are not able to see the weakness of a team or an individual. The story presented in the article is a clear example of reasons why we bring people on to our projects who are actually qualified and up to the task.

2. Task orientation: Focus on goals not tasks. tasks get overwhelming and if the tasks do not bring out the goals that are required, then those tasks are probably not necessary.

3. Single Mindedness: Executives have to have an open mind and listen to their employees in order to ensure they are good Entrepreneurs. Understanding every aspect of your organization.

4.Working in Isolation: The need to form a strong external network is necessary for the growth and success of any organization

I found an interesting article on Entrepreneurs VS Inventors:

http://i-trepreneur.com/2008/09/02/entrepreneur-vs-inventor/

What Should You Do With Your Crappy Little Services Business?

http://techcrunch.com/2011/04/24/what-should-you-do-with-your-crappy-little-services-business/

Fly or Flouder

The article "Why Entrepreneurs Don't Scale." Some of the attributes that were listed in order to be successful in scaling (or will hinder you when attempting to scale), I find that I hold a combination of either not having the attribute or having it too much.

• Loyalty to Comrades: I have never been placed in a situation where my loyalty to my friends in a working situation has been tested in which I would have to choose the success of the outcome on results, not friendship. I honestly do not know how I would handle this situation. In addition, I am aware that it is difficult for me to "be mean" to my friends, though choosing business success over being loyal may not be qualified as mean, I value the friendships I have in a way that may be counterproductive in attempting to make a business succeed and placing the business success as a priority. But again, I have never been placed in this situation.
• Task Orientation: I am aware that at times I do have a weakness of delegating tasks, as I am in the process of learning to trust people's abilities and skills more when working on team, and knowing that they will do their part for the organizational good.
• Single-Mindedness: Being single-minded is sometimes good, but at times distracts your attention from the other several priorities that need to be concentrated on, in which this is difficult for me to differentiate between; when and when not to be single-minded.
• Working in Isolation: This attribute I have not have the opportunity to experience either, thus I have no foundation in which to say how I would handle this type of situation.

How does one develop a working combination of these attributes?

Financial Planning for small businesses

Reading the articles for this final week and trying to work on developing my financial plan I realized the financial plan was the life-line of the entire venture. It could stand by itself and speak a lot about your products/services, revenue stream, staff, expenditures. Cash flow is important for start ups and small businesses. Some important ways to maintain an efficient cash flow system are

1. Perform a good forecast: It is said that small businesses usually do not forecast well on the demand they are likely to receive and the Human resources they would need to deploy to meet that demand. Mapping things week by week to the 12 month forecast we will create, would help SE evaluate where the big expenses are and where payments might be due.
2. Enforce Payment Discipline: It is always best to have a short receivables period, by having a good collection system. Some key questions to ask yourself are
1. How long does it take to get paid?
2. Are you getting the right kind of contact/communication with customers?
3. Are disputed being identified and if so what is the procedure for dissolving these disputes?

This will help your business not only improve its cash flow but also better customer service. If customers are having some problems, invoices wont be cleared fast. Identifying these problems well before they get out of hand is working to our advantage.

3. Segment Customers, Suppliers and Inventory: To better manage cash flow segmenting them into categories and then analysing each will help ascertain where the road blocks are. For example looking at customers , can help you indentify which customers are lagging in their payments and what can be done to improve the situation. In some companies it was identified that the largest account holders had the longest payment cycle. The solution here would be to approach the client with the situation.

Setting financial targets, All start-ups should work on a financial target/objective. One way to set the financial target is to use the Bottom up approach . In this approach begin with marketing, operations and human resource plan calculations found in the respective budget, sales forecast and production plans. Totaling the projected expenses and revenues to determine the financial target. Once the target is arrived on it is up for discussion with your team if such a target is achievable within the given time frame if not, recalculate the original numbers again and recalculate the financial target until and achievable one is reached.

'Back of the napkin' break-even and resource analysis

The break-even point is a critical financial milestone for my venture. Where I will not be pursuing institutional investment or venture capital, the primary factor will be hitting a production level of financial sustainability, not providing extremely large returns to investors.

In terms of operating capital requirements, each vehicle will require an investment of approximately $2,500-3,000 including the vehicle itself, all parts, and any outsourced labor costs. The operating expenses of a two bay garage in Lowell will be in the range of $2,000-2,500 per month including a lease (approximately $1.25/ft sq) and other overhead costs such as equipment loans and insurance.

At an average sale price of $3,500 and a maximum of $500 profit per vehicle this indicates that the business could be cash flow neutral with as few as four vehicles per month (this is probably an underestimate). However, a more reasonable target will be 10 cars per month minimum, as this will provide ample income, approximately $35,000 per month to reinvest in the business.

Assuming a surplus after all expenses and reinvestment in new project cars, there will be enough money to hire up to two non-volunteer employees (or more part-timers) and reinvest in the business. From a capacity standpoint, 10 cars per month also works well for a two bay garage. This would indicate an average cycle time of 5-6 days per vehicle. Any vehicles requiring more than 30 hours of labor and additional testing are not in the scope of our restoration process.

I will be performing more detailed break even calculations in my final report and analysis. However, using some ‘back of the napkin’ calculations, I wanted to quickly show that the business will be viable from a cash flow standpoint. With total start up costs of approximately $60,000, even if all of that money were to come from loans, there will certainly be enough cash available to pay off those loans within a 3 year time period. Additionally, the volume of vehicles at 10 per month will be well within the feasible capacity of the garage space and could easily be managed by a small team of volunteers on my executive board. Assuming a 5 hour investment per car to deal with all purchasing, planning, and sales transactions, the business could operate with about 50 hours per month of direct management time.

Overall, the monthly expenses at a rate of 10 cars per month will be approximately $31,000. This monthly output level will require approximately 250 labor/restoration hours, 50 project management hours, and 50 hours of managing the venture itself per month. This could very reasonably be accomplished within two years utilizing a 5 person management team and a primary volunteer base of 20 people.

The Last Step: Scaling the Venture

I guess it's time to wax philosophical about the big picture a little bit, because most of the technical thinking about my venture is alreay done...so here goes. One of the things I have noticed in listening to the other prospective entrepreneurs in this class talk about their venture is that most of them have the desire and a plan to become really big. Especially with the internet-based operations of Enes and Young Suk, Barbara's nationwide Nigerian health program, etc. These are eminently scalable ventures that would have a great social impact. My venture, on the other hand, is tiny and only serves a small portion of a small city.

Needless to say, I've thought a lot about the fact that my venture is not eminently scalable, not only because the business model is dependent on an old and shrinking stock of buildings but also because I'm not particularly interested in this point at making other cities more sustainable. I don't feel, however, that I am falling into any of the tendencies that prevent venture growth from today's article. I don't think I am too loyal to anyone (I don't even have a team in place yet to be loyal to), I am generally not very task oriented (mostly see the big picture), and I'm not working in isolation, because sustainable development in the abstract will increasingly become a salient social and econmic goal and I will be connected into this business world locally.

I think that my biggest issue in the future will be singlemindedness. For instance, I have this venture plan and I have an idea of where its work fits in with the larger goal of sustainable development in Pittsburgh, but what happens if our business model no longer becomes practical or, alternatively, if new opportunities in sustainability arise? Would I be eager to take on new project? Maybe not, because I would be invested in this green preservation and green construction thing. Going forward, therefore, I think the biggest thing I will have to keep in mind is to allow for new opportunities to increase the scope of my venture and scale it up.

How to Put your Child's life in 30 pages?

CEO's, investors, lenders, executives, and managers are busy, ALWAYS. What an important overlooked point. They get paid big bucks and usually don't have time for waste because that is how they got big in the first place. That point right there exhibits and reminds, that even though you have a large broad report to give, it should be concise, specific, and filled ONLY with the essentials. Even if you provide your reader with fluff, it is doubtful they will even touch half of it. So the essence of the executive summary must be distilled in a way that match your story to your audience, business, and desired outcomes.

Another good gut-check I took away from this executive summary article was the litmus test of having a 5th grader read it and if that adolescent can tell you what you do, you are safe. If the child is lost from that first paragraph, its time to revise!

WHY NOW? Another huge point I personally have to tackle in my own business plan. This probes into understanding what you think you know. "If your idea is so good, why hasn't someone else made this before you?" How come your product isn't in the market yet or already changing the world? There must be some reason making your approach special or something you know differently that will ensure your outcome to be positive where no one else has succeeded before.

After reading and writing all these blog posts, aren't you ready to launch it

Wrapping it up...

Income Statement vs. Balance Sheet vs. Cash Flow Statement:

All three are important although different people value them differently. Income statement shows your performance per action via matching principle. Balance sheet gives your current GPA which is a functions of your assets and liabilities. Cash flow statement illustrates your actual physical cash flows. Again, all three are important for monitoring your company's health.

How to write an executive summary: in short, be compelling, concise and to-the-point. Give them at least 1 reason to invite you for a follow-up meeting. Oh, also avoid BS because your audience (e.g. investors) see that every day already and are immune to it.

Why entrepreneurs don't scale: very insightful article. Loyalty to comrades, task orientation, single-mindedness and working-in-isolation are very-often-encountered characteristics of fledgling CEOs. They are all very difficult to avoid. But the most difficult one for me would be the first one, loyalty to comrades. The example there was illustrative. But when it comes to implementing what was suggested in the article.... That's a different story. I would find it hard to sacrifice friends for the well-being of the company.

A few good principles: 2 insightful points extracted:

- Outline the essence of your business to your employees so that they can take meaningful decisions on their own (assuming they are problem solvers) and will not have to rely on you for everything.

-Making mistakes is great so long as your learn from it. Let your employees be bold and make mistakes (do not let them repeat the same mistakes though!).

Launching and Growing a Social Venture

We are arriving to the end of the course. The last articles are related to writing executive summary, scaling entrepreneurs and learning from marines.

How to Write an Executive Summary

People that I might get most help from are very busy people. When a business plan is given to them, probably the only thing that they may read is the executive summary. That said, a good executive summary can literally open opportunities.

The article provides some advices on writing executive summaries:

• Work on the first paragraph. The first paragraph should clearly explain what the company does. It should compel the reader to read the rest of the summary.
• Match the story to the audience, business and desired outcome. Include the core strength in the summary. Consider to include the following categories: company description, the problem, the solution, and “why now.”
• Use proper tone. The tone depends on the audience. It is also advisable to change the summary for different audiences. In all cases, be confident.
• Limit the length to one or two pages. One or two pages can be printed in on front and back of a single page.
• Avoid superlatives, clichés, or any over-used expressions.
• Proof read. Have it reviewed; if a 5 grader can explain it after reading it, it’s a good sign.

Why Entrepreneurs don’t Scale?

The article mentions four tendencies that keep a founder entrepreneur from scaling:

• Loyalty to comrades: Too much loyalty can become a liability when managing large scale, complex organization.
• Task orientation: Excessive attention to detail can cause a large organization to lose its way.
• Singlemindedness: This attribute can become a hindrance as new ideas are not encouraged.
• Working in isolation: This could result in disconnecting the business with the outside world: customers, investors, analysts, reporters and others.

A Few Good Principles

There are four principles used by Marines that can be applied to businesses:

• Fast is better than perfect. Make fast decisions, indecisiveness is worse than making a mediocre decision (mediocre decision can still work if properly executed). Sometimes determining what actions must be avoided can be important too.
• Make every team member a problem solver. Allow people at lowest level of the organization to make decisions that can impact the success of the organization.
• Reward failure. Failure may not be a bad thing. Failing could mean that people are taking chances and learning from experiences.
• Seek outside perspectives. Consider the outside view of the organization. It can bring new insight and new dimensions to the business.

Applying to my venture

The suggestions provided by the first article regarding the executive summary will be taken into consideration. Specifically I will revise the first paragraph.

The other two articles are useful when the business is in execution.

Indeed, I have experienced two of the tendencies that keep entrepreneurs from scaling: loyalty and task orientation. Loyalty is one of the principles that I praise most, but certainly in business it can result negative effects. Also, as engineer, task orientation is a natural tendency. Instead of delegating works, I tend to review all the decision becoming a bottleneck. Especially, those fields that I am not expert, I should delegate to others.

The Marine was interesting as it broke my belief that Marines was a conservative and strongly hierarchical organization. Although I agree with the principles, they are not easy to put into practice, at least not in a start-up, when the resources are scarce. For example, given a limited budget, all the decision has to be taken with care in order to maximize the ROI. Also failure is seldom an option. Losing a contract or misstep that leads to losing resource could become fatal.

Nevertheless, tardiness in making decision could be harmful as well, and not allowing people to take changes may mean losing competitiveness.

As entrepreneur, I must learn to balance tight situations, handle risks, manage different types of people, and ultimately make correct decision for the overall benefit of the organization. Being an entrepreneur is not an easy job.

Growing A Social Venture-Loyalty to comrades

Before this week, it has been discussed that entrepreneurs may not be a good fit for the executive position when organizations grow. I was puzzled about this phenomenon, as founders are vision setters and have the deepest aspiration to make the venture better. However, after reading through this week’s articles, this puzzle was cleared. Indeed, apart from passion, other things are also critical for entrepreneurs to be catalysts for venture’s growth.

John Hamm raised four characteristics of entrepreneurs that may sabotage ventures to scale up, i.e. loyalty to comrades, task orientation, single-mindedness and working in isolation. I believe that they are more related to leadership styles and working habit than universal characteristics of entrepreneurs who are tech and/or engineer subject experts. And I strongly believe that these characteristics can be avoided or lessened with help from mentors, friends, co-workers and anyone who are close to the entrepreneurs.

Loyalty to comrades sounds interesting to me, as it does not feel as easy and simple as depicted in the article. I personally have doubt about this theory. Running a business is not as simple as hiring the best person and firing the less capable ones. Yes, companies on the Wall Street may succeed due to their well-known ruthless competition and “natural selection”. However, when people talk about why they want to work at such companies with cut-throat competition, I think many of them are attracted by financial returns more by passion to what they do. This is what distinguishes a private company at large with a social enterprise. Social ventures need to attract and retain talents with expertise and yet more importantly, with passion about the mission of the venture. Otherwise, relatively low pay cannot compete with investment banking and trading positions. If these people are willing to strive for a future with the venture, on the entrepreneurs’ side, I do not think they should be as fierce and ruthless when treating their employees.

The example given in the article is more of a communication problem than a loyalty problem. The entrepreneur did not communicate well with the engineer and share his and the board’s expectations to him. I do not believe that loyalty is blind and without principles. Being loyal can be accompanied by arguing, fighting and high standards, similar to relationship building I suppose. Being loyal does not mean that entrepreneurs cannot criticize co-workers or have to stand up for everything that colleagues do.

In addition, dealing with loyalty has something to do with culture as well. In the United States where it is known for “it’s just business, nothing personal,” it is a different story in Asian countries. People care about past history and tears and happiness shared together, more than today’s fitness in the organization. Sacking an colleague easily who has worked with entrepreneurs for a long time and contributed to the organization, for whatever reason, may not be as easily accepted by employees as here in the US. The fired would resent the entrepreneur’s ruthlessness, and other employees would wonder if one day they would experience the same thing. Having said that, I would by no means mean that entrepreneurs should keep everyone even they are incompetent to what’s required. What I want to say is that it has to be dealt with carefully; otherwise it may be a factor that sabotages employees’ loyalty to the entrepreneur.

Having said these, I still have a question in mind. This article proposes that blind loyalty may stop entrepreneurs from scaling; on the other hand, if we think about it, entrepreneurs also need loyalty from their co-founders and employees in order to scale the enterprises. How shall entrepreneurs retain talents and align them with vision of the venture? What approaches can they take? How can loyalty be utilized as an opportunity instead of as a risk for the venture?


I found an interesting article on advice to angel groups. Standing in venture cabalists’ shoes may help us tailor our venture to their needs.
http://news.change.org/stories/5-ideas-for-social-venture-angel-groups

The Financial Aspect

Financial Planning and Investment

For me, financial planning is a challenging task. Besides that I have no background in financial planning, the uncertainties in the new venture make it even harder.

Regardless of its difficulty, financial planning is an essential part of business planning, and certainly important information for potential investors.

The readings this week are related understanding the concept of Profit, the Income Statement and the Cash Flow Statement. The articles were simple but informative.

Income statement

The income statement begins with sales, the cost and expenses on the income statement are those it incurred in generating the sales recorded during the time period. This is called the Matching Principle, where costs are matched to the sales to determine profits in a given period of time.

The income statement tries to measure whether the provided products or services are profitable when everything is added up. Different department head uses this information for various purposes; for example, marketing director may use this information to know which product is profitable to emphasize in marketing campaign.

Nevertheless the company cannot rely on profitability alone. This is because many times the bill money is collected later, and the real cash flow are not reflected in the profit.

Balance Sheet

Statement of what a business own and what it owes at a particular point in time. The difference between that it owns and what it owes represents equity.

Understanding the balance sheet means understanding all the assumptions, decisions, and estimate that go into it.

In business accounting, what company owns is called assets, what company owes is called liabilities, and the net worth is called equity.

assets – liabilities = equity.

* When a company buys a piece of capita, the cost doesn’t show on the income statement, rather the new asset appears on the balance sheet and only depreciation appears on the income statement as a charge against profits.

Cash Flow

Cash Flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. (From Wikipedia).

Things that can be done to improve

• Account Receivable: Keep the customer informed about their statement. Have the customer pay their bills on time.
• Inventory: Apply principles of lean enterprise to keep the inventory low.
• Expenses: Consider timing of cash flow when making purchase.
• Giving credit: Maintain a careful balance between cash flow and credit sales.

Cash flow is the key indicator of the company’s financial health, along with profitability and shareholder’s equity.

Applying to my venture

Understanding of finance and accounting is important. Profit, income statement and cash flow are all basic information used by investors in their decision making.

My venture is a service business. There will be no inventory, and no credits. Hopefully this will make the finance analysis simpler.

The expense will mainly be site hosting, rent, employee payroll, and marketing expenses. Therefore the profit will be sales minus the fixed cost.

Maybe this is an oversimplified analysis with too many assumptions. Probably the real world I will face more complex financial situations.

- Young

All about Product Launches

Here is an interesting video on the specifics of launching your product. The video addresses other issues as well, that would most certainly be applicable to many of our ventures. The video is about 11 minutes long. I encourage you to take a look.

http://blogs.hbr.org/video/2011/04/lessons-from-new-product-launc.html

Financial Knowledge

This week’s readings focused on the financial aspects of starting a venture. It is interesting to note that there was a distinction made between a cash-flow statement and an income statement. Although the article described the basics of the two, I needed a deeper understanding of the difference between the two. I thought that this video on YouTube does a good job of explaining the difference.

http://www.youtube.com/watch?v=dTJ9-daH3HI&feature=related

and here is a video that explains the cash flow statement in a nice visual manner.

http://www.youtube.com/watch?v=JGcbsj6FN6c&feature=related

Figuring out the finances of my company is extremely essential and I wish we were introduced to finances a little earlier. This is because, so much of my venture hinges on getting the finances in shape. Right from the estimated profit to the target sales and therefore the size of the consumer base. I feel that knowing this earlier in the venture process, could bring in a little more clarity in terms of defining the business.

Having said that, I have to now restructure some of the elements based on the cash flow. I was initially thinking about stocking 500 lamps at a time in my office/warehouse. But this would not help my cash-flow in any way. I would now restructure this to order the numbers I need every weekend. This would require me to talk to my lamp supplier and convince him of having a continuous supply as opposed to a one time supply.

Another question that pops up is, if I need to hire a permanent accountant / financial manager. I am grossly under-educated in the areas of accounting and finance and definitely need help in preparing these balance sheets. The critical question is in judging what falls into an accrued expense or an accrued income for an income statement. Can I afford to spend enough time doing this? Is it worth the effort? Or should I just go on and hire a full-time accountant? That would mean additional recurring expenses – but it might be worth it in the long run. How do I make this decision? Can somebody give me a few suggestions?

This week’s reading – on the whole – really got me thinking seriously on the finances. Coming from a technological/engineering background, I had – to be honest – downplayed the importance of managing finances. I also learned to appreciate the difference between generating sales and managing your accounts - there is a big difference – managing your accounts in equally important in the long run to the success of your venture as is the act of sustaining sales. And perhaps it is with this ‘awakening’ that I start becoming financially knowledgeable.

Inspiring you must listen to this

http://www.ted.com/talks/caroline_casey_looking_past_limits.html wanted to share this with you all this is very inspiring for all of us as social entrepreneurs.

Calculating Social Value

Both articles were insightful. Based on these 2 articles and my understanding of social value literature there is no single prominent way of calculating social value.

The first article listed some techniques to determine social value. In my department, EPP Benefit-cost analysis and decision analysis are used rather often although what metrics you incorporate is really important. Also, I'd advise using probabilistic assumptions rather than deterministic ones in computing social value (remember our lecture about uncertainty).

Again, there is social value is pretty vague and we need to utilize all of the tools available to us to make an educated decision. Although I am not working on a non-profit, we need to execute rigorous mental exercise to understand our vision and our shareholders'/investors' vision. What do we value? What do they value? What should we/they value? I think vision is the defining factor in social value.

As a side note I would like to underscore a metric that can be very useful in social value calculation, Value of Statistical Life (VSL), namely. A lot of social initiatives can be translated into increase in life expectancy. Knowing the number of life years added per person we can convert this into a monetary value via VSL. There are multiple ways of calculating VSL, one of them is surveying people. Check out these two articles for a clearer definition:

Hua Wang and Jie He, "The value of statistical life: A contingent investigation in China," Policy Research Working Paper 5421, The World Bank, 35pp., 2010. (8)

OECD, "Valuing lives saved from environmental, transport and health policies: A metaanalysis of stated preference studies, ENV/EPOC/WPNEP(2008)10/FINAL 60pp.,2010. (8)

To put things in context, Westerners tend to value their lives at $10 million/year whereas in the developing world we see VSL on the order of $10 thousand /person/year.

This can give a sense of how our social value could be converted into monetary terms.

Social Value & its Variability

I am one of those people, as the article identifies, that approaches social value as "subjective, malleable, and variable." Although I believe social value is all of these things, I think this is what makes it even more difficult to create better metrics to capture it. How do you measure something that is subjective, malleable, and variable. Will the metrics not continuously change due to the variability of the subject? Also, how do you measure such a thing that is variable but also has so many outside factors such as the environment affecting it? These are the many questions that are running through my mind when thinking of my venture. I know what I would like the social outcome to result from The People's Station, however I am not sure about the route to take in measuring it as well as how I would remove outside factors, such as other programs, that will also be effective in changing the social outcome of my target population.

Calculating Social Impact

Figuring out how to calculate the social impact I'm going for has been something I've been trying to figure out for a while. On one hand, the social good I'm trying to achieve is economic development, which in theory should be by nature easier to monetize that other social benefits. However, there are also secondary benefits, like improved perception of Pittsburgh on the part of newcomers, that I think will also happen, although that is just a theory at this point.

The theory behind onlyinpgh creating a positive economic effect for neighborhoods is based on the idea that a lack information about a place is a disincentive to to go there. For example, someone might have heard of Lawrenceville and may even know that it's generally a hipper part of the city, but if they're unsure what exactly are good places to go or events to attend, they will be less likely to go there and more likely to either stay home or stay near their home. Just as transportation is seen as a net economic benefit by making markets more accessible, information works similarly by increasing demand through broadening the customer base.

I'm confident in that theoretical model based on market research and literature searches I've done, but the problem with measuring the impact onlyinpgh will have is that there are a lot of confounding variables. Information is a factor that goes into someone's decision to go somewhere, but there are many, many others, so sorting out the amount of net benefit created through onlyinpgh is difficult. This is also true with the other benefits I think may happen but have less theoretical backing for. If I'm surveying people's perceptions of Pittsburgh and it gets better over time, there really isn't any way to empirically prove what portion of that was due to me.

My idea right now to measure benefit is to actually run some experiments using onlyinpgh when it is up and running. For example, I can give people a survey about their perceptions of Pittsburgh before and after using onlyinpgh and compare the results to a control group. Or, I can survey people after they've used the system to see if using it resulted in them going to a part of the city they wouldn't have otherwise.

Both of these would be hard and resource-intensive, however--any suggestions for other ways to isolate onlyinpgh's social benefit?

Social impacts on social ventures

We all hope that our social ventures would bring about social impact, be it in healthcare, education, science or music. I particularly enjoyed the calculated impact reading because it makes the results from social ventures seem more tangible. This is also a great way to show to investors and other donors the expected return on their dollars/monies. As rightly stated in the article, In the end, expected return analysis is not a substitute for intuition, but rather a structure for testing one’s intuitions about what strategies are likely to work. An expected return approach encourages philanthropists to be realistic about what they can achieve with their resources.

I found this article that discusses social investing and the concept of social return on investment.http://www.uniteforsight.org/social-entrepreneurship-course/module7

This is another case study on valuing a social venture about 3 people who whose mission to assist saving human lives by becoming the leading network of basic life support ambulances in India. If you go through the case study, there is a detailed sheet that shows calculations like a balanced sheet and actually provides the net income/ social impact calculation. http://www.acumenfund.org/uploads/assets/documents/ZHL%20-%20Valuing%20a%20Social%20Venture%20case%20study_QPTbo8nz.pdf.

Measuring Social Impact vs. Private Market Profit Margins

While I don't think I agree with what Geoff Mulgan writes about measuring social impact, or at least the main thrust which is that value is mostly subjective, I do like the fact that he pointed out that social ventures would benefit from the private market approach of using different metrics to determine where to invest resources, return on investment, etc. In other words, there isn't any one single number that you can just throw out there that will make a venture or project worth doing- instead you should be able to find out how much people will value it (demand curve), what costs are acceptable to you as a firm with your own specific company culture and needs (supply curve), what the probability of success is, and so forth. I think Mulgan is mistaken, however, when he claims that assigning an objective dollar value to any of these metrics and instead assigning a 0-5 subjective score, is the best route. This brings me to my main point which gets to the nature of the development industry. If my venture were to use subjective assessments of a project's value to consumers and to the venture, it would most certainly be undercut by industry trends that promote high perceived value at low cost. That is to say that in development, a value-added product like a green home isn't necessarily valued by society unless its true value is made explicit. I use the example of big box retail a lot, but the reason the big box model has been so attractive to the development community is because it offers consumers huge monetary value for relatively little money (think Sam's Club). Developers achieve the same high rewards for minimal input, and they always have in mind a profit margin before even starting a project. One of their first acts is to project, using market research, traffic studies, etc. how many people will use a building and how much they will value its service. What good would it be for me, a green developer, to use a 0-5 scale to measure my venture's potential benefit for consumers? That would be like saying to a potential renter who is looking at other offerings around the city, "yes sir, our apartments are more expensive, but they're worth a 4 out of 5 in energy savings." The very nature of a value-added service like ours has a pretty real dollar value attached to it because it is designed to save consumers $x over the long run. And as for the uncertainty, sentimentality, or biases of consumers weighing on their opinions, I believe that market research, statistical trend analysis, forecasting, etc. are enough to predict product or service value fairly accurately.

Measuring Social Value

As mentioned in one of this week’s readings: “Social Value is not an objective fact” (Mulgan 2010). Rather, it is based on biases and circumstances and “may change across time, people, places, and situations” (Mulgan 2010). This variability in the nature of social value begs the question as to what is the best way to measure it. How can we effectively compare the social value created by an organization such as Share Our Strength, which seeks to end childhood hunger in the US, with the Audubon Society, which seeks to protect and rebuild the country’s ecological systems?

To help answer this question, I went hunting for additional readings that can expound on the insights offered by the Stanford Social Innovation Review writers:

1. This is a 45-page PDF written by the Gates Foundation. It provides good insights that expound upon our readings. Make sure to check out page 10, which explains eight cost approaches to determining social value: http://www.gatesfoundation.org/learning/documents/wwl-report-measuring-estimating-social-value-creation.pdf

2. This is another useful, albeit more basic, PDF that details how/why to measure social value. It is written in conjunction with the London Business School. http://sroi.london.edu/Measuring-Social-Impact.pdf

3. Here is a link to a downloadable book that summarizes the different frameworks that can be used to measure social value. The download is available for free. http://www.demos.co.uk/publications/measuring-social-value

Thankfully, my search for further information on the topic of measuring social value proved very fruitful, but I am always interested in learning more key insights into the topic. Does anyone know of any? Does anyone have a unique opinion on the importance of measuring social value and the best way to do so? If so, please share.

Sources

Mulgan, Geoff. "Measuring Social Value." Stanford Social Innovation Review, 2010: 38-43.